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Mexico’s tax break trouble

President-elect Felipe Calderon to decide on measure

MEXICO CITY — Mexico’s corporate tax incentive for film production is in danger of being tanked by the taxman.

While corporate sponsors had lined up to back films, Mexican tax authorities’ official silence on how they will interpret the law, approved late last year, has spooked investors from taking advantage of the incentive. Now, it’s up to the new administration of President-elect Felipe Calderon to save the measure — or send it to the graveyard.

Unofficially, tax officials have told investors they won’t allow for the application of the law as legislators intended.   

“This incentive was a light of hope for Mexican producers,” said Epigmenio Ibarra, head of indie Mexican production company Argos. “But tax officials are doing everything possible to undermine the spirit of the law.”

The measure had generated intense interest from major companies in the entertainment biz, such as top Mexican exhib Cinepolis and Columbia TriStar Mexico — whose parent Sony is also looking to take advantage of the incentive. It’s also drawing interest from corporate sponsors who have invested in films in the past but were frustrated by the difficulty in making a profit on local productions; among these sponsors are telco mogul Carlos Slim, the world’s third-richest man. Corporations that had never invested in film before also began boarding projects.

“Everything is completely on hold right now until tax officials issue an official interpretation,” says Leonardo Zimbron, head of Warner Bros. Mexico’s local production office.

Mexican producers have been lobbying the government for nearly a decade to implement film production incentives. The new measure is similar to a law in Brazil that has been credited with helping to revive the local industry.

Congress approved a version of the incentive in 2004, but it was unused due to ambiguities in the text.    A similar fate has befallen the new version of the law passed in late 2005. The law was supposed to allow any company or investor to write off up to 10% of their annual income tax obligation and invest that money in film.

Mexico’s film fund Fidecine issued rules on the incentive in mid-September, but officials at the Finance Ministry have unofficially informed investors that they don’t agree with the film fund’s interpretation of the law.

Jose Hernandez, a partner at PricewaterhouseCoopers in Mexico City, said the law was poorly written and that tax officials could interpret the measure to mean that companies can deduct only 10% of their total investment, which can total up to 10% of their total income tax obligation — a pittance compared to the intention of the law.

“Until the Treasury speaks on this, there is a lack of legal certainty on how they will let the incentive be applied,” Hernandez says.

Tax officials did not respond to requests for interviews.

As of the end of October, 24 films had applied and received the go-ahead from film fund Fidecine, said the fund’s director Victor Ugalde. The approved projects total nearly $24 million in potential corporate financing.

But only a handful of the approved projects have seen the cash from their timid corporate sponsors and have been able to enter production.

Monica Lozano, head of Altavista films and president of Mexico’s independent producers association, said producers were preparing an onslaught of lobbying to convince Mexico’s incoming administration to back the incentive. Lozano said producers would be lobbying the new Congress as well as Calderon’s administration, which takes office on Dec. 1.

“Its like we are right back were we started when we tried to get the incentive approved,” says Lozano. “Except now investors that have become interested could be scared off for good.”

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